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END-OF-YEAR TAX PLANNING 2021

END-OF-YEAR TAX PLANNING 2021

Tax planning is an essential tool to help individuals and businesses manage their finances in the coming year to understand how they can reduce their overall tax burden and prepare for new laws and regulations. Partner Michael Bucci explained some of the biggest hurdles to prepare for in the coming tax year.

Individuals who are business owners who usually defer their taxes--a common tax planning strategy--may want to consider accelerating their income and paying taxes at the current rate. "The last couple years, because of the tax rates being historically low and the fact that we were anticipating possible increases in taxes in the future, we have been advising our clients to accelerate income to 2020 and 2021 and pay tax at the lower tax rates," Bucci said. Similar concepts can be applied to selling highly appreciated assets or real estate, he said.

In addition to anticipated tax increases, Bucci noted the tax law proposes to move the high-end tax bracket to target income levels around $450,000, rather than the current $628,000. Also important to note is that net-investment income tax would include business income, which could add a 3% modified adjusted gross income tax on top of the usual rate if the amount comes to over $5 million. All this adds up to a maximum tax rate of 46.4% for top earners.

Qualified Business Income (QBI) could also see changes to the current limits. "There's going to be a limit of $500K for married filing joint and $400K for single people, whereby income over and above that you will not be eligible for that 20% exclusion of income to be taxed for a business owner that's a pass through," Bucci said.

However, there is good news in New York state. Pass through entities, defined as either partnership or S corporation who "pass through" income to the individual shareholder partners on their personal tax returns, who made an election through New York state's online website will be able to choose to pay their New York state tax on their corporate level or their partnership level. "It enables them to take that deduction before that income gets passed through, which is very important because most higher-end taxpayers or most taxpayers in New York who pay real estate taxes in New York pay high real estate taxes," Bucci explained. "Your state taxes are limited personally to $10,000 before you pay tax on the pass-though income. This will allow almost 100% deduction on the federal level for that tax being paid."

For companies seeking to save on taxes, there are a couple of strategies Bucci employs with his clients. These include projections of year-end income and expenses and year-end tax liabilities, buying equipment for additional deductions, and increasing profit sharing contributions to retirement plans through bonuses. Depending on the company, it can also be helpful to accelerate or decelerate income to prepare for the coming year.

Above all, Bucci said to keep in the mind that "tax advisory is very personal and there's many different aspects to advising clients on tax aspects. I always try to impress upon my clients that we need to plan early and often."

 

Read the full article published by Albany Business Review.

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